You can’t blame your real estate agent. The bigger the house she can put you in, the higher her commission. When the bank comes back with your loan approval, you can bet that your agent will take one look at that number and try to find you every single house in that price range, but is that really a good idea? Just because you can afford a certain amount of house, does that mean you need that amount of house? By downsizing just a little, you may be able to save $70,000 or more over the life of your loan.
Determine How Much House You Need
When the bank evaluates you for a home loan, it will give you the highest number it thinks that you can afford to pay back without defaulting. It’s easy to see this number as a green light, allowing you to immediately start searching for houses in that price range.
Hold on a minute. This is only what the bank is willing to loan; that doesn’t mean that you have to take it all. Instead of letting the bank set your budget, figure out what you feel most comfortable paying. After all, if you buy the most house that you can afford, that mortgage payment is going to take a big chunk out of your income. Maybe you can buy a four-bedroom, 3,000-square-foot house, but do you really need that many rooms or that much square footage? If not, then there’s no reason to buy up to your loan limit.
Let’s say that the bank approves you for a 30-year, $500,000 home loan at an interest rate of 4%. You find an amazing, beautiful house for exactly that amount. If you were to buy it, you’d be on the hook for $359,347.53 in interest over the life of the loan. Ouch! Now, let’s say you find a slightly smaller, older house without so many bells and whistles. It’s still very nice and is selling for $400,000. If you picked this house instead, you’ll save $71,869.50 in interest over the life of the loan. You could save even more if you overpaid your mortgage each month, applying the excess to the loan principal. This will be a little easier for you since your payments would be $477.42 less each month than if you purchased the $500,000 home!
Don’t Let Your Real Estate Agent Sway You
Your real estate agent wants her commission, but don’t let her earn it by upselling you on more house than you need. Buying a home can be a highly emotional decision. Even if you set a lower budget than what you are approved for, your agent might show you a more expensive house because it is “too good to pass up.” It’s extremely easy to get “used to” houses outside the range you set for yourself or to fall in love with a house that’s more than you want to spend.
Resist the urge to overspend unless you are willing to literally put your money where your mouth is. Instead, set your budget and stick to it. Your real estate agent may make a slightly lower commission, but you’ll be able to use that $70,000 in interest you’ll save to pay off your house early, catch up on retirement savings, or a save for a child’s college fund!
Want to learn more great saving habits? Consider starting a Money Club in your area. You can also keep reading our Budgets & Planning article archive.
(You might also like: The Age-Old Question – Should You Rent or Buy a Home?)